Qualifying retirement plans
Non-Qualified Retirement Plans
These deferred compensation plans allow an employee to postpone receiving income and earning wages for some time. An employer must be responsible for maintaining the deferred income in a special fund until the employee leaves the company. Contributions to non-qualified retirement plans are subject to taxes only when withdrawn from the plan and not during the years the earnings take place. Employers usually use broad tax regulations when structuring such plans. Additionally, non-qualified retirement plans generally do not include employer contributions; instead, the proceeds come from the employee’s earned gross income. As a result, an employee can build funds for his retirement without actually paying taxes on the contribution until they are withdrawn from the plan in later years.
Non-qualified retirement plans are relatively painless to operate, though there are several considerations one should be aware prior to using this model. First, the plan is not retroactive, which means the non-qualified retirement plan can only apply to current income withholding. Next, a person may not withdraw or borrow funds at any time, as most plans have specific maturation dates. Some plans have provisions reading that specific events must occur prior to an individual receiving his funds. Finally, the plan is not secured from creditors, who can petition for access to the funds should the person have outstanding debts.
Qualified Retirement Plans
Qualified retirement plans are structured retirement plans that comply with government regulations. One can establish such a plan under the auspices of an employer or through a bank or other financial institution. The IRS has specific codes detailing the provisions for qualified retirement plans. Also, qualified retirement plans are eligible for special tax considerations.
Employer based qualified retirement plans- pension funds and profit sharing plans – must comply with government regulations and grant the employer certain tax privileges. An employer may be able to deduct contributions to the pension plan as a business expense, and the employee would not be liable for taxes until he withdraws the funds after his retirement. Profit sharing plans, like pension plans, are employer contributions to employee’s retirement plans. Depending on the tax structure and income generated by the employee, he, after retiring, will likely have to pay taxes on the amounts withdrawn from his plan.
Individual retirement plans are common options for either self employed people or those who wish to have an additional security on top of their existing pension or profit sharing plan. An IRA, or Individual Retirement Plan, is a popular type of qualified retirement plan. This allows an individual to redirect some of his annual income into the plan without any tax liability. Of course, like with other retirement plans, the employee will then be responsible for paying taxes upon withdrawing funds when retired. Most IRAs allows tax-deductible contributions no greater than $4,000 per year unless the individual is over 50; then, the individual can contribute more annual income.
To read more on retirement planning as well as CD rates see www.cdrates.org
